Rate Cut a Golden Opportunity

So, the Fed jumped in ahead of their regularly scheduled meeting and cut the Fed Funds rate down to 3.5%. While there are many reasons for the move, one key Fed desire is to spur lending growth in the nation's banking community. This usually happens with a rate cut, but this time the response may be a bit different than in years past.

It seems not a day goes by that we don't hear about a mega bank writing down billions of dollars due to loan losses, bad investments, etc. This situation has had the broader impact of tightening lending criteria at banks across the country. Due to bank's uncertainty about their balance sheets, and to a large extent their uncertainty (or suspicion?) about their retail and commercial customer's balance sheets, they may severely cut back on loan approvals. The Wall Street Journal has a similar prediction:

A big worry now is banks' reluctance to lend to businesses and households. When last polled by the Federal Reserve, bank senior loan officers reported last fall that they were tightening lending standards. The steep losses stemming from the subprime debacle that many banks reported this month may mean that they will cut back further on lending -- especially if they are unsure what other losses they might be taking in months to come.

With Central Bank on the Move, Some Answers on What It Means

By JUSTIN LAHART, January 24, 2008

Does this not present a golden opportunity for credit unions to fill the void? If the rate cut inspires the consumer and business communities to borrow, and their traditional avenues are closed off because of simple reluctance to lend, would we not stand to gain by opening our doors wide to potential members with the message that credit unions are once again stepping in to help those who can't get credit elsewhere? It seems that for some of the financial institutions out there all borrowers are bad risks right now. That certainly cannot be completely true, and if it isn't true then there are great loans going unfunded.

We've got the strength to do this. By and large we are not directly exposed to the subprime crises (we've felt the slowdown in mortgage lending, but we've not had the write-downs from bad loans), and we have direct connections in the "communities" we serve allowing us to make the case that we have our member's best interests at heart. Yes, there is risk, but perhaps this is what our strong capital position has prepared us for - taking advantage of a perfect storm.